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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1999
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or
[_]Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934.
For the transition period from __________ to __________
Commission File Number: 0-26245
ESPS, Inc.
(Exact name of registrant as specified in its charter)
Delaware 24-2845135
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 Virginia Drive, Suite 125, Ft. Washington, PA 19034
- - --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 619-6000
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
---
As of August 10, 1999, 15,504,315 shares of the registrant's Common Stock, par
value $0.001 per share, were outstanding.
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ESPS, INC.
FORM 10-Q
QUARTERLY REPORT
INDEX
<TABLE>
Page No.
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<S> <C>
Facing Sheet 1
Index 2
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Balance Sheets (Unaudited) 3
Statements of Operations (Unaudited) 4
Statements of Cash Flows (Unaudited) 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
PART II - OTHER INFORMATION
- - ---------------------------
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 27 Financial Data Schedule 16
</TABLE>
2
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PART I - FINANCIAL INFORMATION
- - ------------------------------
Item 1. FINANCIAL STATEMENTS
- - -----------------------------
ESPS, INC.
----------
BALANCE SHEETS
--------------
(In thousands)
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 24,869 $ 1,812
Accounts receivable, net of allowance of $127 5,743 6,210
Accounts receivable, related party 258 158
Other current assets 472 340
Deferred income taxes 322 322
Deferred offering costs - 696
------------- --------------
Total current assets 31,664 9,538
Property and equipment, net 3,273 2,330
Other assets 28 28
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Total assets $ 34,965 $ 11,896
============= ==============
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt $ 110 $ -
Accounts payable and accrued expenses 3,151 3,267
Deferred revenues 2,088 1,905
------------- --------------
Total current liabilities 5,349 5,172
Long-term debt 523 -
Stockholder's equity:
Series A Preferred stock, $0.001 par value: Authorized shares
6,000, issued and outstanding shares, 0 and 6,000 at June 30,
1999 and March 31, 1999, respectively - 6
Common stock, $0.001 par value: Authorized shares 50,000,
issued and outstanding shares, 15,421 and 3,154 at June 30,
1999 and March 31, 1999, respectively 15 3
Additional paid-in capital 28,810 6,570
Retained earnings 455 349
Deferred stock compensation (187) (204)
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Stockholders' equity 29,093 6,724
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Total liabilities and stockholders' equity $ 34,965 $ 11,896
============= ==============
</TABLE>
See accompanying notes to unaudited financial statements.
3
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ESPS, INC.
----------
STATEMENTS OF OPERATIONS
------------------------
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
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June 30,
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1999 1998
<S> <C> <C>
Revenues:
Software licenses $ 3,829 $ 2,040
Services and maintenance 2,085 915
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Total revenues 5,914 2,955
Cost of revenues:
Software licenses 97 70
Services and maintenance 1,401 587
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Total cost of revenues 1,498 657
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Gross profit 4,416 2,298
Operating expenses:
Research and development 1,198 701
Sales and marketing 2,326 587
General and administrative 792 549
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Total operating expenses 4,316 1,837
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Income from operations 100 461
Interest, net 71 50
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Income before income taxes 171 511
Income tax provision 65 198
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Net income $ 106 $ 313
======= =======
Earnings per share:
Basic $ 0.02 $ 0.14
======= =======
Diluted $ 0.01 $ 0.02
======= =======
Shares used in computation of earnings per share:
Basic 5,179 2,165
======= =======
Diluted 15,455 14,138
======= =======
Pro forma earnings per share:
Basic $ 0.01 $ 0.03
======= =======
Diluted $ 0.01 $ 0.02
======= =======
Shares used in computation of pro forma earnings per share:
Basic 12,445 10,865
======= =======
Diluted 15,455 14,138
======= =======
</TABLE>
See accompanying notes to unaudited financial statements.
4
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ESPS, INC.
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STATEMENTS OF CASH FLOWS
------------------------
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
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June 30,
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1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income $ 106 $ 313
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 166 64
Amortization of deferred stock compensation 17 54
Provision for losses on accounts receivable - 33
Changes in operating assets and liabilities:
Accounts receivable 367 721
Other assets (132) (77)
Accounts payable and accrued expenses 580 (20)
Deferred revenues 183 (1,286)
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Net cash provided by (used in) operating activities 1,287 (198)
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Investing activities:
Purchases of property and equipment (467) (280)
Financing activities:
Proceeds from the sale of common stock 22,241 -
Repayments of long-term debt (9) -
Proceeds from exercise of stock options 5 65
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Net cash used in financing activities 22,237 65
Net increase in cash and cash equivalents 23,057 (413)
Cash and cash equivalents balance, beginning of period 1,812 4,558
-------- -------
Cash and cash equivalents balance, end of period $ 24,869 $ 4,145
======== =======
Supplemental cash flow disclosure:
Interest paid $ 4 $ -
Income taxes paid $ 5 $ -
Fixed assets financed through capital lease obligations $ 642 $ -
</TABLE>
See accompanying notes to unaudited financial statements.
5
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Item 1. FINANCIAL STATEMENTS (Continued)
ESPS, INC.
---------
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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1. Description of Business and Basis of Presentation
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Description of ESPS, Inc.
ESPS, Inc. is a leading provider of enterprise compliance management solutions
to businesses in highly regulated industries. Our solution, which consists of
the CoreDossier family of software products and related services, enables users
across departments and throughout an enterprise to collaborate in the authoring,
compilation, distribution and publishing and reuse of compliance information and
regulatory submissions. We designed our CoreDossier software products to utilize
advanced technologies, such as corporate intranets and the Internet, and to meet
emerging electronic compliance requirements and standards. We believe our
solution enables our customers to realize a return on their investment by
reducing the cost and burden of compliance while also reducing the time required
to bring new products and services to market.
On June 15, 1999, the board of directors declared a 1.45 for 1 stock split in
the form of a stock dividend. All periods presented have been restated to
reflect this stock split.
Initial Public Offering
On June 16, 1999, we completed an initial public offering of 3.5 million shares
of common stock at $7.50 per share. The offered shares generated net proceeds to
ESPS, Inc. of approximately $22.2 million. Concurrent with the offering, all
6,000,000 shares of our convertible preferred stock automatically converted into
8,700,000 shares of common stock.
Interim Financial Information
The accompanying unaudited financial statements have been prepared in conformity
with generally accepted accounting principles for interim financial information
and with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed, or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission. In our opinion, the
statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction with
our audited financial statements for the fiscal year ended March 31, 1999,
included in our prospectus, dated June 16, 1999, filed with the Securities and
Exchange Commission in connection with our initial public offering. Our results
of operations for any interim period are not necessarily indicative of the
results of operations for any other interim period or for a full fiscal year.
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2. Net Income Per Common Share
---------------------------
Basic and diluted net income per common share is calculated by dividing the net
income by the weighted average number of common shares outstanding. Pro forma
net income per share is computed using the weighted average number of shares
used for basic per share amounts and the weighted average convertible preferred
stock outstanding as if such shares were converted to common stock at the time
of issuance.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended
------------------
June 30,
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1999 1998
---- ----
<S> <C> <C>
Net income $ 106 $ 313
======= =======
Weighted average number of common shares outstanding 5,179 2,165
Effect of dilutive securities:
Stock options 3,010 3,273
Series A preferred stock 7,266 8,700
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Adjusted weighted average shares outstanding and assumed conversions 15,455 14,138
======= =======
Pro forma adjustment to weighted average number of common shares
outstanding for the conversion of series A preferred stock 7,266 8,700
------- -------
Pro forma weighted average shares:
Basic 12,445 10,865
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Diluted 15,455 14,138
======= =======
Earnings per share:
Basic $ 0.02 $ 0.14
======= =======
Diluted $ 0.01 $ 0.02
======= =======
Pro forma earnings per share:
Basic $ 0.01 $ 0.03
======= =======
Diluted $ 0.01 $ 0.02
======= =======
</TABLE>
3. Long-Term Debt
--------------
In June, 1999, prior to the initial public offering, the Company entered into a
$642,000 capital lease agreement, consisting of software and hardware to support
the Company's infrastructure. The term of the lease is 60 months with monthly
payments of approximately $13,000.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - --------------------------------------------------------------------------------
OF OPERATIONS
-------------
Certain statements in this Form 10-Q contain "forward-looking" information (as
defined in Section 27A of the Securities Act of 1933, as amended) that involve
risks and uncertainties which may cause actual results to differ materially from
those predicted in the forward-looking statements. If any of our assumptions on
which the statements are based prove incorrect or should unanticipated
circumstances arise, our actual results could materially differ from those
anticipated by such forward-looking statements. The differences could be caused
by a number of factors or combination of factors, including, but not limited to,
those listed under this caption "Factors Affecting Operating Results" described
herein and the Risk Factors described in our filings with the Securities and
Exchange Commission, including our Form S-1.
Overview
- - --------
ESPS provides software solutions that enable businesses in highly regulated
industries to reduce the costs and overall burden associated with traditional
compliance processes. Our electronic compliance management solution utilizes
advanced technologies, such as corporate intranets and the Internet, and has the
ability to scale throughout an enterprise. The CoreDossier family of software
products and related services enables users to collaborate in the authoring,
compilation, distribution, publishing and reuse of compliance information and
regulatory submissions. In
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addition to advanced technology, we provide our customers with in-depth
industry-specific compliance expertise that allows us to better understand their
compliance needs and requirements.
Results of Operations
- - ---------------------
The following table presents statement of operations data as a percentage of
total revenues:
<TABLE>
<CAPTION>
Percentage of
-------------
Revenues
--------
Three months
Ended June 30,
--------------
1999 1998
---- ----
<S> <C> <C>
Statement of Operations Data:
Revenues:
Software licenses 64.7% 69.0%
Services and maintenance 35.3 31.0
----- -----
Total revenues 100.0 100.0
Cost of revenues:
Software licenses 1.6 2.4
Services and maintenance 23.7 19.9
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Total cost of revenues 25.3 22.3
----- -----
Gross profit 74.7 77.7
Operating expenses:
Research and development 20.3 23.7
Sales and marketing 39.3 19.9
General and administrative 13.4 18.6
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Total operating expenses 73.0 62.2
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Income from operations 1.7 15.5
Interest, net 1.2 1.7
----- -----
Income before income taxes 2.9 17.2
Income tax 1.1 6.7
----- -----
Net income 1.8% 10.5%
===== =====
</TABLE>
Comparison of Three Months Ended June 30, 1999 and 1998
- - -------------------------------------------------------
For the three months ended June 30, 1999, revenues were $5.9 million, an
increase of 100% over the $3.0 million for the comparable period in 1998. Net
income for the three months ended June 30, 1999 was $106,000, or $.01 per
diluted share, compared to net income of $313,000, or $.02 per diluted share for
the same period in 1998. Weighted average shares used in computing diluted
earnings per share in the first fiscal quarter were 15.5 million versus 14.1
million in the same period in the prior year.
Revenues
License revenues. License revenues increased 88% to $3.8 million for the three
months ended June 30, 1999, from $2.0 million for the three months ended June
30, 1998. This increase in license revenues is attributable to increased
acceptance and demand for the Company's products and increased sales and
marketing activities.
Services and maintenance revenues. Services and maintenance revenues increased
128% to $2.1 million for the three months ended June 30, 1999 from $915,000, for
the three months ended June 30, 1998. The increase reflects the greater
implementation capabilities and increased maintenance on a larger customer base.
Total revenues outside of the United States increased 91% to $1,099,000 for the
three months ended June 30, 1999, from $576,000 for the three months ended June
30, 1998. This increase resulted from an increase in license sales and from the
sale of our products and services to existing customers with operations outside
the United States. International license revenues represented 20% of total
license revenues, or $772,000, in the three months ended June 30, 1999, compared
to 22%, or $442,000, for the three months ended June 30, 1998.
For the three months ended June 30, 1999, one customer accounted for 18% of
revenues and for the three months ended June 30, 1998, four customers accounted
for 59% of revenues.
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Cost of Revenues
Cost of software licenses revenues. Cost of software licenses revenues consists
primarily of royalties we pay to third parties for the use of their technology
incorporated into our CoreDossier products. Cost of software licenses revenues
increased 39% to $97,000 for the three months ended June 30, 1999 from $70,000
for the three months ended June 30, 1998. This increase resulted primarily from
an increase in the sale of our CoreDossier products. Cost of software licenses
revenues as a percentage of software licenses revenues were 3% for both periods.
Cost of services and maintenance revenues. Cost of services and maintenance
revenues consists primarily of personnel costs related to professional services
and customer support. Cost of services and maintenance revenues increased 139%
to $1,401,000 for the three months ended June 30, 1999 from $587,000 for the
three months ended June 30, 1998. This increase resulted primarily from the
hiring and training of professional services and customer support personnel to
support our increased customer base. Cost of services and maintenance revenues
as a percentage of services and maintenance revenues were 67% for the three
months ended June 30, 1999 and 64% for the three months ended June 30, 1998. The
lower services and maintenance margins were attributable to start-up costs
associated with new hires. The cost of services and maintenance revenues as a
percentage of services and maintenance revenues may vary among periods because
the various services we provide have different cost structures.
Operating Expenses
Research and development. Research and development expenses consist primarily of
salaries and benefits for software developers, quality assurance personnel, and
program managers and technical writers.
Research and development expenses increased 71% to $1,198,000 for the three
months ended June 30, 1999 from $701,000 for the three months ended June 30,
1998. This increase resulted from an increase in the number of software
developers and quality assurance personnel, to 50 employees as of June 30, 1999
from 29 employees as of June 30, 1998. This increase was needed to support our
product development and testing activities. Research and development expenses
represented 20% of our total revenues for the three months ended June 30, 1999
and 24% for the three months ended June 30, 1998. The decrease in research and
development expenses as a percentage of total revenues primarily reflects the
more rapid growth of our revenues compared to the investment in our research and
development activities during this period.
Sales and marketing. Sales and marketing expenses consist primarily of salaries,
commissions earned by sales personnel, travel, promotional expenses and
communication costs related to direct sales efforts.
Sales and marketing expenses increased 296% to $2,326,000 in the three months
ended June 30, 1999 from $587,000 for the three months ended June 30, 1998. This
increase resulted primarily from our increased investment in sales and marketing
infrastructure, both domestically and internationally. The investments included
personnel-related expenses of $1,001,000, travel and entertainment expenses of
$214,000, and related facility and equipment costs of $203,000. In addition, we
increased marketing activities, including trade shows, public relations, direct
mail campaigns and other promotional activities by $269,000. Sales and marketing
expenses represented 39% of our total revenues for the three months ended June
30, 1999 and 20% for the three months ended June 30, 1998.
General and administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for executive, finance,
administrative, and information services personnel. These expenses also include
fees for legal, accounting, and consulting services.
General and administrative expenses increased 44% to $792,000 for the three
months ended June 30, 1999 from $549,000 for the three months ended June 30,
1998. This increase resulted from increased hiring, training and payroll related
costs associated with the addition of executive, finance and administrative
personnel to support the growth of our business. The number of our executive,
finance and administrative personnel grew to 22 at June 30, 1999 from 11 at
June 30, 1998. General and administrative expenses represented 13% of our total
revenues for the three months ended June 30, 1999 and 19% for the three months
ended June 30, 1998.
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Interest, net. Interest, net is derived from interest income earned on our cash
and cash equivalents, offset by interest expense on our capital lease. Net
interest income increased 42% to $71,000 for the three months ended June 30,
1999 from $50,000 for the three months ended June 30, 1998. This increase was
primarily attributable to income earned on the invested proceeds from the
Company's initial public offering on June 16, 1999 and interest on certificates
of deposit.
Income tax provision. Income tax provision decreased by $133,000 to $65,000 for
the three months ended June 30, 1999 from $198,000 for the three months ended
June 30, 1998. This decrease resulted primarily from lower income before income
taxes.
Liquidity and Capital Resources
- - -------------------------------
As of June 30, 1999, we had cash and cash equivalents of $24.9 million, an
increase of $23.1 million from cash and cash equivalents held at March 31, 1999.
Our working capital at June 30, 1999 was $26.3 million, compared to $4.4 million
at March 31, 1999.
Our operating activities resulted in net cash inflows of $1.3 million for the
three months ended June 30, 1999 and $198,000 of net cash outflows for the three
months ended June 30, 1998. The sources of cash in the three months ended June
30, 1999 were primarily income from operations, increases in deferred revenues,
accounts payable and accrued expenses, and decreases in accounts receivable
offset by decreases in other assets. The operating cash outflows for the three
months ended June 30, 1998 resulted from decreases in deferred revenue and an
increase in other assets, partially offset by decreases in accounts receivable.
Investing activities used cash of $467,000 for the three months ended June 30,
1999, and $280,000 for the three months ended June 30, 1998 for the purchase of
property and equipment.
Financing activities provided cash of $22.2 million for the three months ended
June 30, 1999 due to the proceeds from the sale of common stock from the
Company's initial public offering. Financing activities provided cash of $65,000
for the three months ended June 30, 1998, which represents proceeds from the
exercise of stock options.
We anticipate that we will continue to experience significant growth in our
operating expenses. Operating expenses will consume a material amount of our
cash resources, including a portion of the net proceeds of the public offering.
We believe that the net proceeds of the public offering, together with our
existing cash and cash equivalents, will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next
twelve months.
The Company is expanding its corporate facilities during the second quarter of
fiscal 2000. This expansion is not expected to have a material effect on cash
flow or operating results.
Risk Associated with the Year 2000
- - ----------------------------------
Many currently installed computer systems are not capable of distinguishing 21st
century dates from 20th century dates. As a result, beginning on January 1,
2000, computer systems and software used by many companies and organizations in
a wide variety of industries (including technology, transportation, utilities,
finance and telecommunications) will produce erroneous results or fail unless
they have been modified or upgraded to process date information correctly.
Significant uncertainty exists in the software industry and other industries
concerning the scope and magnitude of problems associated with the century
change. We recognize the need to ensure our operations will not be adversely
affected by Year 2000 software failures. We have completed our initial
assessment of the potential overall impact of the impending century change on
our business, financial condition and operating results.
Based on our current assessment, we believe the current versions of our software
products are Year 2000 compliant-that is, they are capable of adequately
distinguishing 21st century dates from 20th century dates. However, our products
are generally integrated into enterprise systems involving sophisticated
hardware and complex software products that we cannot adequately evaluate for
Year 2000 compliance. We may face claims based on Year 2000 problems in other
companies' products, or issues arising from the integration of multiple products
within an overall
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system. Although we have not been a party to any litigation or arbitration
proceeding involving our products or services related to Year 2000 compliance
issues, we may in the future be required to defend our products or services in
such proceedings, or to negotiate resolutions of claims based on Year 2000
issues. The costs of defending and resolving Year 2000 related disputes,
regardless of the merits of such disputes, and any liability we have for Year
2000 related damages, including consequential damages, could materially
adversely affect our business, financial condition and operating results. In
addition, we believe that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or upgrade their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
software products such as those we offer. To the extent Year 2000 issues cause a
significant delay in, or cancellation of, decisions to purchase our products or
services, our business, financial condition and operating results would be
materially adversely affected.
We have reviewed our internal management information and other critical business
systems to identify any Year 2000 problems. We also have communicated with the
external vendors that supply us with material software and information systems
and with our significant suppliers to determine their Year 2000 readiness. In
the course of these investigations, we have not encountered any material Year
2000 problems with these third-party products.
To date, we have not incurred any material costs directly associated with our
Year 2000 compliance efforts, except for compensation expense associated with
our salaried employees who have devoted some of their time to our Year 2000
assessment and remediation efforts. As discussed above, we do not expect the
total cost of Year 2000 problems to be material to our business, financial
condition and operating results. However, during the months prior to the century
change, we will continue to evaluate new versions of our software products, new
software and information systems provided to us by third parties and any new
infrastructure systems that we acquire to determine whether they are Year 2000
compliant.
Despite our current assessment, we may not identify and correct all significant
Year 2000 problems on a timely basis. Year 2000 compliance efforts may involve
significant time and expense and unremediated problems could materially
adversely affect our business, financial condition and operating results. We
currently have no contingency plans to address the risks associated with
unremediated Year 2000 problems.
Factors Affecting Operating Results
- - -----------------------------------
Our future operating results are uncertain and likely to fluctuate. Our
operating results have varied widely in the past, and we expect that they will
continue to fluctuate in the future. In addition, our operating results may not
follow any past trends. It is particularly difficult to predict the timing or
amount of our license revenues because
. our sales cycles are lengthy and variable, typically ranging between
three to nine months from our initial contact with a potential customer
to the signing of a license agreement, although occasionally sales
require substantially more time;
. the amount of unfulfilled orders for our products at the beginning of a
quarter is small because our products are typically shipped shortly
after orders are received; and
. we recognize a substantial portion of our license revenues in the last
month of a quarter, and often in the last weeks or days of a quarter.
Nevertheless, we base our decisions regarding our operating expenses on
anticipated revenue trends. Because many of our expenses are relatively fixed, a
delay in recognizing revenue from a limited number of license transactions could
cause our operating results to vary significantly from quarter to quarter and
could result in operating losses. To the extent these expenses are not followed
by increased revenues, our operating results will suffer.
Our results fluctuate from quarter to quarter. In the past, the software
industry has experienced significant downturns, particularly when general
economic conditions decline and spending on management information systems
decreases. Our business, financial condition and operating results may fluctuate
substantially from quarter to quarter as a consequence of general economic
conditions in the software industry. In addition, the fiscal or quarterly budget
cycles of our customers can cause our revenues to fluctuate from quarter to
quarter. As a result of
11
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all of these factors, we believe that period-to-period comparisons of our
operating results are not meaningful, and you should not rely on such
comparisons to predict our future performance. Fluctuations in our operating
results, particularly compared to the expectations of market analysts or
investors, could cause volatility in the price of our common stock.
We have a limited operating history. We commenced operations on April 29, 1994
and commercially released the initial version of CoreDossier in November 1995.
Accordingly, we have a limited operating history, and we face all of the risks
and uncertainties encountered by early-stage companies. Our limited operating
history makes it difficult to forecast our future operating results. The new and
evolving nature of the electronic compliance market increases these risks and
uncertainties. We expect to continue to devote substantial resources to our
product development, sales and marketing, and customer support. As a result, we
will need to generate significant quarterly revenues to achieve and maintain
profitability. Our business strategies may not be successful, and we may not be
profitable in any future period.
We may be unable to expand our sales and support infrastructure. To date, we
have sold our products primarily through our direct sales force and have
supported our customers with our consulting and customer support staff. Our
future revenue growth will depend in large part on recruiting and training
additional direct sales, consulting and customer support personnel. We have not
experienced difficulty in recruiting qualified sales and support personnel. We
may not be able to successfully expand our direct sales force or other
distribution channels and any such expansion may not result in increased
revenues. If we are unable to hire highly trained consulting and customer
support personnel, we may be unable to meet customer demands. Our business,
financial condition and operating results will be materially adversely affected
if we fail to expand our direct sales force or our technical and customer
support staff.
We depend on certain key employees. Our future performance will also largely
depend on the efforts and abilities of our key technical, customer support,
sales and managerial personnel and on our ability to retain them. Our success
will depend on our ability to attract and retain such personnel in the future.
In addition, the loss of any of our executive officers could materially
adversely affect our business, financial condition and operating results. On
August 5, 1999, Terrence P. Brennan, the Company's President and Chief Executive
Officer, underwent heart valve replacement surgery. He is recuperating and the
Company expects him to return to his duties in approximately six weeks, however,
at this time, we can give no assurances as to the specific date of his return.
The Board of Directors appointed Leonard von Vital, the Company's Chief
Financial Officer, as acting Chief Executive Officer, until Mr. Brennan returns.
Our market is subject to rapid technological change. The software market in
which we compete is characterized by rapid technological change. Existing
products become obsolete and unmarketable when products using new technologies
are introduced and new industry standards emerge. For example, we may need to
modify our products when third parties change software that we integrate into
our products. As a result, the lifecycles of our products are difficult to
estimate. To be successful, we must continue to enhance our current product line
and develop new products that successfully respond to such developments.
Our business, financial condition and operating results would be materially
adversely affected if we delay release of our products and product enhancements
or if these products and product enhancements fail to achieve market acceptance
when released.
We face risks from expansion of our international operations. We intend to
expand our international operations and may enter new international markets.
This expansion will require significant management attention and financial
resources. We may not be able to maintain or increase international market
demand for CoreDossier. We do not currently engage in currency hedging
activities, but we may do so in the future. Increases in the value of the U.S.
dollar relative to foreign currencies could materially adversely affect our
operating results.
Our sales cycle is long. Consequently, the period between initial contact and
the purchase of our products is often long and subject to delays associated with
the lengthy budgeting, approval and competitive evaluation processes that
typically accompany significant capital expenditures. Our sales cycles are
lengthy and variable, typically ranging between three to nine months from our
initial contact with a potential customer to the signing of a license agreement,
although occasionally sales require substantially more time. Sales delays could
cause our operating results to vary widely.
12
<PAGE>
We depend on service revenues. Support and service revenues represented 25% of
our total revenues for fiscal 1999 and 35% of our total revenues for the first
quarter of fiscal 2000. We anticipate that service revenues will continue to
represent a significant percentage of total revenues. Because service revenues
have lower gross margins than license revenues, a continued increase in the
percentage of total revenues represented by service revenues or an unexpected
decrease in license revenues could have a detrimental impact on overall gross
margins and our operating results.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- - --------------------------------------------------------------------
We are exposed to financial market risks, including changes in interest rates.
We typically do not attempt to reduce or eliminate our market exposures on our
investment securities because the majority of our investments are short-term. We
do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio. All of the potential changes noted above are based on
sensitivity analysis performed on our balances as of June 30, 1999.
PART II - OTHER INFORMATION
- - ---------------------------
Item 1 Legal Proceedings
- - -----------------------------
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not involved in any legal proceedings, which would, in management's opinion,
have a material adverse effect on the Company's business or results of
operations.
Item 2. Changes in Securities and Use of Proceeds
- - -----------------------------------------------------
(c) Sales of Unregistered Securities During the Quarter
During the quarter ended June 30, 1999, ESPS issued and sold 18,833 unregistered
shares of its common stock to employees and a consultant pursuant to the
exercise of stock options under its 1995 Stock Incentive Plan.
(d) Use of Proceeds
On June 16, 1999, ESPS's registration statement on Form S-1, (333-75397), was
deemed effective. All shares offered have been sold. The managing underwriters
were Hambrecht & Quist, BancBoston Robertson Stephens, U.S. Bankcorp Piper
Jaffray and Charles Schwab & Co., Inc. The offering consisted of 3,500,000
shares of common stock, $0.001 par value (plus an additional 525,000 shares of
common stock from selling stockholders to cover the underwriters' over-allotment
option). The aggregate price of the shares offered and sold was approximately
$26.2 million to ESPS and $3.9 million to selling shareholders. Proceeds to
ESPS, after accounting for $1.8 million in underwriting discounts and
commissions and $2.2 million in expenses, were $22.2 million
We are using the net proceeds raised in the initial public offering for working
capital and general corporate purposes, including increased domestic and
international sales and marketing expenditures, product development
expenditures, expenditures related to the expansion of our professional services
organization and capital expenditures made in the ordinary course of business.
We may also use a portion of the net proceeds to acquire additional businesses,
products and technologies or to establish joint ventures that we believe will
complement our business. However, we have no specific plans, agreements or
commitments, oral or written, to do so. We are not engaged in any negotiations
for any acquisition or joint venture. The amounts that we actually expend for
working capital purposes will vary depending on a number of factors, including
future revenue growth, if any, the amount of cash we generate from operations
and the progress of our product development efforts. As a result, we will retain
broad discretion in the allocation of the net proceeds of this offering. Pending
the uses described above, we will invest the net proceeds in short-term,
interest-bearing, investment-grade securities.
13
<PAGE>
None of the net offering proceeds were directly or indirectly, paid by ESPS to
directors or officers of ESPS or their associates, persons owning 10% or more of
any class of our securities, or affiliates of ESPS.
Item 3. Defaults Upon Senior Securities
- - -------------------------------------------------
There have been no defaults by the Company on any Senior Securities during the
quarter ended June 30, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
- - -------------------------------------------------------------
No matters were submitted to a vote of the Company's stockholders during the
first quarter of the fiscal year covered by this report through the solicitation
of proxies or otherwise.
Item 5. Other Information
- - ---------------------------
On August 5, 1999, Terrence P. Brennan, the Company's President and Chief
Executive Officer, underwent heart valve replacement surgery. He is recuperating
and the Company expects him to return to his duties in approximately six weeks,
however, at this time, we can give no assurances as to the specific date of his
return. The Board of Directors appointed Leonard von Vital, the Company's Chief
Financial Officer, as acting Chief Executive Officer, until Mr. Brennan returns.
Item 6. Exhibits and Reports on Form 8-K
- - ------------------------------------------
(A) Exhibits
(27) Financial Data Schedule
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by this Form 10-Q.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized this 12th day of August
1999.
ESPS, INC.
By: /s/ Leonard W. von Vital
------------------------
Leonard W. von Vital
Chief Financial Officer
(As Acting Chief Executive Officer and as
Principal Financial and Chief Accounting
Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUATERLY
10-Q 6/30/99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999
<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 24,869 1,812
<SECURITIES> 0 0
<RECEIVABLES> 5,870 6,337
<ALLOWANCES> 127 127
<INVENTORY> 0 0
<CURRENT-ASSETS> 31,664 9,538
<PP&E> 4,354 3,245
<DEPRECIATION> 1,081 915
<TOTAL-ASSETS> 34,965 11,896
<CURRENT-LIABILITIES> 5,349 5,172
<BONDS> 0 0
0 0
0 6
<COMMON> 15 3
<OTHER-SE> 29,078 6,715
<TOTAL-LIABILITY-AND-EQUITY> 34,965 11,896
<SALES> 3,829 2,040
<TOTAL-REVENUES> 5,914 2,955
<CGS> 97 70
<TOTAL-COSTS> 1,498 657
<OTHER-EXPENSES> 4,316 1,804
<LOSS-PROVISION> 0 33
<INTEREST-EXPENSE> (71) (50)
<INCOME-PRETAX> 171 511
<INCOME-TAX> 65 198
<INCOME-CONTINUING> 106 313
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 106 313
<EPS-BASIC> .02 .14
<EPS-DILUTED> .01 .02
</TABLE>
